Warren Buffett doesn’t like your brand

Brands used to be ‘trust marks’ of quality – a promise from the manufacturer that his product was a high-quality, trustworthy product that he’d stand behind. There were plenty of competing soda fountain flavours in the US south in the late 1800s, but Coca-Cola was a known quantity that tasted the same – and great – no matter where you bought it.

Over the ensuing century, as government regulation, food safety and consumer protection laws increasingly reassured consumers, brands became less about trust and certainty, instead becoming advertising catchphrases which were designed to appeal to consumers.

And advertising did its job. The ‘Mad Men’ and their successors turned brands into symbols of affection and desire. They appealed to our aspirations, fears, dreams and insecurities.

We didn’t leave home without an American Express card, we were happy little Vegemites, Coke was ‘it’ and we loved football, meat pies, kangaroos and Holden cars. The brands we loved became, in themselves, a shared experience – and we embraced them.

It’s also fair to describe a second, parallel track – the rise of consumerism in general, and its unhealthy extreme – conspicuous consumption.

Know my brands, know me

Brands in the 21st century are, for many people, things that define us – they show us (and others) what we think of ourselves and each other. You only have to look at the mobile phone advertising to see that in action – Apple appealing to fashion and aesthetics, BlackBerry to the ‘get it done’ corporates, Samsung to the ‘better than Apple’ crowd and Nokia (unsuccessfully) poking fun at each group with a message that they were different.

But it’s more than that. For many, we don’t only buy the brands we like, but we display them to show something of ourselves to the world. What we wear, drive and use is partly about how we see ourselves and partly about how we want others to see us.

We can only wonder what Star Trek’s Mr Spock would make of us paying $1,000 for a leather handbag that costs a small fraction of that to make – or a t-shirt that costs more simply because of the brand. Some of us pay up, never questioning the motivation. Others of us kid ourselves that we’re paying for quality, fit or functionality. To the extent that’s true, it’s a small part of the real rationale – no matter what we tell ourselves – and it rarely, if ever, justifies the higher price.

When it comes to investing, those emotional, less-than-rational decisions are marketing gold. It’s those things that let companies charge a premium for their products, and for investors to rake in the profits.

It’s what causes long lines at the Apple store, puts a premium price on Coach handbags and Mercedes Benz cars and, yes, even allows Coke to charge more than Pepsi for a can of soft drink. (I’m not doubting each of those are premium products – but the extent of the price difference can ‘t be explained purely by rational product differences).

But a brand – particularly one that relies on fashion or high-speed innovation – will both live and die by the sword.

An enduring powerhouse or a fleeting presence?

As Warren Buffett said: “Your premium brand had better be delivering something special, or it’s not going to get the business.”

For many years, Bonds underwear and Sheridan sheets were what the industry likes to call ‘go to’ brands. They were the standard setters and the default choice for many Australians. Retailers stocked them because they thought consumers wanted them – at least that’s what the sales numbers suggested.

These brands meant something – they were familiar, Australian brand names with long histories and we knew they were quality products. Sure, they cost a little more, but, for the most part, we happily paid up.

That was until cheaper competition arrived, in the form of much cheaper, unbranded alternatives. K-Mart led the charge with its ultra-low priced clothing, directly sourced from overseas. It discarded most of its branded offerings, and aimed straight for consumers’ hip pockets.

Follow the money

If you ask Australians, we’ll tell you that we want to buy quality, Australian made products from Australian companies… until we open our wallets. Then, money talks, and it says that, in many cases, we just want to buy cheap.

The new phalanx of online retailers – and daily deals sites – has taken it to a new level. There’s rarely a week that passes when you can’t buy 1,000 count Egyptian cotton sheets for previously unheard-of prices. All of a sudden the previously ‘premium’ products seem to be overpriced and under-featured.

The maker of Bonds and Sheridan, Pacific Brands (ASX: PBG) is yet to find a way to adequately respond to the new threats. Indeed, K-Mart’s success almost proves Warren Buffett’s point – that, having brands that Australians know and trust isn’t enough, when you have someone else doing what you’re doing, but cheaper and as good or better.

Grocery retailers are proving the same point when it comes to home brands, while the technology industry is littered with the corpses of products and companies that were overtaken by a better (and usually cheaper) alternative.

Brands can be a wonderfully powerful tool to provide companies with a competitive advantage that is hard to beat – as long as that advantage is tended to and sustained or improved over time. Coca-Cola is a wonderful example, and Mercedes-Benz is another.  Warren Buffett calls a company’s competitive advantage its ‘moat’ – that thing which allows your company’s ‘castle’ to be protected and to flourish in the face of competition.

But the presence of a well-known trademark isn’t enough to charge high prices and to allow a company to rest on its laurels when it comes to innovation. Once, Bonds may have been a brand people were prepared to pay more to buy. It only took the arrival of cheaper competition to highlight the fact that Bonds wasn’t so much the keen preference of consumers, but their fall-back, default choice ‘unless I find something better’.

Foolish takeaway

In the wake of the September 11 attacks on the World Trade Centre, Buffett gave his managers some simple instructions:

“Just what you always do: Widen the moat, build enduring competitive advantage, delight your customers, and relentlessly fight costs.”

As investors, our job is to look for companies whose managers are following Buffett’s advice – not just presiding over a company with some well-known brands, but actively working to make those brands ever more attractive, relevant, desired and preferred by ever more consumers.

Otherwise, we might just be invested in a company that is marking time until a hungrier competitor ruthlessly takes its place.

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Scott Phillips owns shares in Pacific Brands, Coca-Cola Amatil, The Coca-Cola Company and Berkshire Hathaway.

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